Life Insurers Assess Financial Modeling Trends in Towers Watson Survey
CFO survey reveals that model run-time requirements are a leading challenge and top priority
NEW YORK--(BUSINESS WIRE)-- Chief financial officers (CFOs) from large and midsize life insurance companies agreed that financial modeling, an increasingly important tool for their business, remains a work in progress, according to a new survey by global professional services company Towers Watson (NYSE, NASDAQ: TW). The survey explored pressing financial modeling issues for life insurers, including model governance, business priorities and how insurers use financial models.
Survey results offer a view into where life insurers see limitations with their financial modeling. All respondents reported a certain level of confidence regarding their financial modeling results, though nearly two-thirds (65%) recognized the need for improvement. When CFOs were asked how satisfied they are with the timeliness of their models' results, only 13% said extremely satisfied, and 17% said not at all. Most CFOs (91%) expressed uneasiness with the time required to interpret model results before their teams could actually begin acting on the information.
"Our survey revealed that despite advances made in financial modeling at many life insurance companies, there are ever-increasing demands placed on companies by their stakeholders to improve the speed and usefulness of their financial models," said Cheryl Tibbits, director and life insurance consultant at Towers Watson. "However, new technologies are available, allowing for more improved and efficient approaches to financial modeling."
Uses and Challenges
The survey assessed respondents' varying levels of satisfaction with their organizations' financial modeling capabilities by life insurance product type. Given a grouping of product types to choose from, CFOs indicated that long-term care and life reinsurance products need the most work, with half (50%) not at all satisfied with their modeling capabilities for long-term care products, while 36% expressed dissatisfaction with their financial modeling capabilities for life reinsurance products.
Insurers were asked about the biggest challenges they face in getting what they need from financial models and instructed to choose the top three. More than two-thirds (70%) named managing competing priorities as their biggest challenge, followed by run-time requirements (44%) and model features/functionality (39%). When asked which of these challenges they would address first, run-time requirements (22%) ranked as their most pressing priority.
"The feedback from insurers on prioritizing day-to-day challenges reflects the importance they're placing on finding solutions to reduce run time, which in turn allows them to create an environment that yields a faster and more confident decision-making process," said Jack Gibson, managing director, life insurance consulting, Towers Watson.
According to the survey, life insurance CFOs have mixed views on how they govern their financial models to minimize the potential for model output to incorrectly inform management decisions. Most companies have dedicated resources in place to build and run models, and specialized modeling expertise concentrated in different areas, such as on corporate modeling teams (70%) and business units (61%). Only 13% use an outside vendor. Over half (52%) of participants reported that model governance process in their organization is somewhat developed, while 22% indicated very developed governance. Yet despite these encouraging findings, nearly two-thirds of CFOs (65%) plan to make changes to their governance process, and just 26% do not anticipate making any modifications.
"A firm grasp on an organization's financial modeling process allows a CFO to gain confidence. Strong audit controls and good governance practices are essential to this step," said Steve Verhagen, senior life insurance consultant, Towers Watson.
The survey also examined insurers' attitudes toward financial modeling tools and how financial modeling competes with other business priorities. Two-thirds (66%) of the participants said their organizations aim to extract the full value of their financial modeling tools. When asked to prioritize areas for further investment, 39% ranked information technology infrastructure as a high priority, yet only 4% considered investment in financial modeling a similarly important objective. Fifty-seven percent of respondents said they would weigh proposed investments in financial modeling against other potential areas before making a final decision on where to spend their budget.
"CFOs are dealing with opposing business priorities when it comes to investing in their infrastructure. While they recognize the importance of financial modeling tools, they're more inclined to procure the latest and greatest in information technology infrastructure," said Gibson.
CFOs also provided a glimpse of their anticipated financial results, reporting slower growth compared to results from the Life Insurance CFO Survey conducted by Towers Watson last year. The majority of respondents revealed that their new life and annuity premiums, GAAP net revenue and GAAP net income remained flat or declined in the second quarter of 2012, compared to the same quarter in 2011.
About the Survey Program
Towers Watson's Life Insurance CFO Survey program provides ongoing research on issues of importance to the North American life insurance industry. The program enables CFOs and financial executives to benchmark their company's approach to financial issues and challenges against those of their competitors. Participants benefit from Towers Watson's independent analysis of the survey results, as well as perspectives on key issues facing the life insurance industry. This survey program was first launched in 2002, and includes responses from CFOs and senior financial executives from large and midsize North American life insurers.
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.
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